New economic mood?

Some analysts believe Americans' spending habits have been permanently altered

Los Angeles Times

Published Sunday, August 10, 2008

Oil prices are plunging, and the stocks in your 401(k) retirement account are rebounding.

Time to fire up the SUV, head to the mall and whip out that credit card?

That's what automakers, retailers, restaurateurs and other industries dependent on consumers are hoping, of course. They need this economic malaise to blow over quickly, and that will require Americans to get back into a good mood and open their wallets again.

But there is a school of thought out there that says many people have been permanently changed by the economic blows the nation has suffered over the last year -- the unprecedented quadruple whammy of the dive in home prices, tumbling stock values, soaring energy and food prices, and the credit crunch.

We've all been warned for years to spend less and save more. Maybe we're taking that to heart now.

That's the view of David Rosenberg, a veteran economist at Merrill Lynch & Co. in New York. He has a dour outlook for U.S. economic growth in large part because he thinks Americans have gotten religion about their personal finances.

For many consumers, Rosenberg says, "frugality is now replacing frivolity."

That's evident, he said, in looking at the trends in Americans' personal spending in the last three quarters, as detailed in the government's data on gross domestic product.

Excluding outlays for three key necessities -- medical care, food and utilities -- consumer spending shrank at a 0.3 percent annual rate in both the fourth quarter of 2007 and the first quarter of this year, Rosenberg noted in a report this week.

In the second quarter, he said, that same gauge of consumer spending grew at an anemic 0.8 percent annual rate -- despite the federal tax rebates to about 100 million families.

In fact, many people saved that rebate money instead of spending it, at least by the government's calculations, which subtract personal outlays from personal disposable income. The savings rate derived from that data jumped from a mere 0.3 percent of income in the first quarter to a six-year high of 2.6 percent in the second quarter.

But what's to stop that money from ending up in some retailer's cash register in the current quarter?

Rosenberg is betting that a large number of Americans have been frightened enough by what they've seen unfold in the economy this year to keep them from sliding back into spendthrift mode.

What's more, he notes, a crucial factor that supported the spending wave of the last 20 years was the ability to borrow with abandon. Those days are over, as banks, brokerages, auto companies and other lenders cut back on credit. That shift "is only starting to sink in to the general public," Rosenberg asserts.

Rather than borrow more, many people will be forced to pay down their debts, he said. That, too, will divert money from spending.

One other point he makes, and maybe the most important: For the 78 million baby boomers, retirement no longer is a far-off concept, but an approaching reality. And with home prices sinking in many regions of the nation, the original retirement plan for a huge number of boomers -- selling the McMansion at a big profit --won't cut it, Rosenberg says.

"This, in turn, means that we are all collectively going to be relying less on assets and more on good old-fashioned wage and salary income for future savings," he said.

Rosenberg's case for a new national frugality sounds logical enough.

But we're talking about us, here -- the world's most devoted consumers. For 25 years, it has been a consistently bad bet to count on Americans keeping their pocketbooks sealed for very long.

Edward Yardeni, another veteran economist and head of Yardeni Research in Great Neck, N.Y., says the era of McMansions and SUVs may well be over. But he thinks it's a mistake to extrapolate those consumption shifts into a widespread frugality.

Spending is a function of income, Yardeni notes. If people are earning money, they'll tend to spend most of it.

If employment doesn't collapse, and incomes keep rising, it's hard to fathom a sustained pullback in spending, he said.

And because U.S. workers' productivity keeps advancing -- it grew at a 2.2 percent annualized rate last quarter, government data show -- that's keeping American companies competitive and, in theory, less likely to have to drastically pare payrolls in a tough economy.

But there's another, more practical reason to doubt that Americans will seek to substantially boost their savings at the expense of spending, Yardeni says: Many people who know they're already far behind in building a nest egg for retirement are going to realize that catching up would be impossible, anyway.

"There's just no way you can really save out of the median income in this country and retire comfortably," he said.

If you can't possibly save enough, and your home won't produce a windfall, there's only one answer, Yardeni said: working longer. That's what millions were planning to do, anyway, he figures.

Of course, it's easy to say at age 52 that you'll work until you're 70. But what if your health won't allow it?

That's the potential time bomb ahead if the New Frugality is a myth: The people who do save are likely to have to pay dearly for those who don't.